Marketing Management Assignment help on : Investment and competitive attractiveness of South African food retail sector
Abstract:
The report is on the investment and competitive attractiveness of South African food retail sector. It is into three parts. The first part does the diamond model analysis of South African market. The second part delves into contemporary management issues in South African food retail industry. The third part is on entry strategies.
Feasibility Report:
Our company is headquartered in United Kingdom. It is into food retailing. The top management is considering expansion into South Africa. International expansion is part of our corporate strategy.
South Africa has a growing population of middle class. Besides this it is also one of the popular tourist destinations of the world. Both these factors are favorable for the retail food industry there.
Over the past three years the average rate of annual growth of retail food industry in the country has been around 5%. Retailers like Woolworth’s already have a strong presence in the African nation.
South Africa has a population of around 50 million. It enjoys modern urban infrastructure which facilitates supply chain management and distribution across the length and breadth of the country.
Food items like fruits, vegetables, sausages, sauces and condiments have a strong demand in South Africa (Leonard Thompson, 2001). One of the drawbacks that food retail industry in the country suffers from is the limited food processing capacity installed there. Unlike many developed nations South Africa has a shortage of food processing facilities.
Main players in the South African food retail industry:
The major players in the South African food retail industry are Woolworths, Shoprite, Pick n Pay and Shoprite. Sales of food & beverage items accounted for around 15 % of the total retail turnover of $ 80 billion in 2011 (Economist, 2012).
South American consumers increasingly prefer the convenience and value offered by organized food retailers. This presents an opportunity for our company. There is still a lot of scope for market penetration in the country. Competition has not reached to the point of saturation and there is space for new players.
There are hypermarkets, smaller convenience stores, cooperative stores in rural areas and cash-and-carry wholesale outlets which make up the organized food retail industry in the country.
Pricing is an important source of competitive advantage in the South African food retail industry. Consumers are price sensitive and prefer those retailers which are able to deliver higher value for their money.
It is cost effective if food items are outsourced from local farmers. Many hypermarkets have achieved cost leadership by buying food items from local farmers and processors in large quantities and at lower prices.
South African food retailers also sell a large variety of imported food items and beverages. Most of the retailers have their in-house import departments or rely on outside importers for getting the goods that they want.
Demand for health food and organic food has grown lately in the African country. This is because of increased health consciousness in the local population. Ready-to-eat food items are also quite popular in urban centers where a significant portion of the population is working class.
South African consumers prefer stores which are open till late at night. Many round-the-clock food and beverage stores have come up in recent years in the country’s major cities like Cape-town and Johannesburg.
Customers value fresh food and seem ready to pay some premium for them. Organized retailers, because of their better supply chain management, are more effective in delivering on this parameter (Traill, Bruce; Eamonn Pitts ,1998).
There is also strong demand for frozen food items like frozen seafood. Consumption of dairy products like processed milk and ice-cream has also grown over the years. Due to rise in per capita income over the years consumption pattern has changed. Demand for high value food items and nutritious products like eggs, fish and fresh fruits is growing consistently.
Consumers are aware about the quality that they want. More and more consumers now take notice of the label on food items which gives details about quality and composition of these items.
The demand for mineral water bottles has seen a spurt lately. Consumers show some amount of loyalty when it comes to food and beverage products. Goodwill generated by retailers determines the strength and nature of this loyalty.
The franchise route for expansion runs the risk that the franchisees may not be able to deliver the quality and service associated with the parent brand. Many supermarket chains therefore took their franchises back from local franchisees because of quality and service issues. However the franchise route can be quite effective for rapid expansion inside the South American market.
Part 1: Porter’s National Diamond Analysis for the South African market:
The diamond model was first propounded by Michael Porter in his book The Competitive Advantage of Nations. This analysis of South Africa reveals:
i) Factor conditions: When it comes to human resources South Africa’s situation has deteriorated over the years. Much of the blame for this can be pinned on the dismal state of primary education in the country. According to the World Economic Forum, South Africa ranks 132nd among 144 countries in primary education and 143rd in science and mathematics. HIV and AIDS took the form of endemic and caused deaths of millions, including that of one of Nelson Mandela’s sons (Economist, 2012).
When it comes to physical resources like mines and minerals the country is literally a treasure trove. Minerals are still one of the biggest sources of revenue for the economy. The state of infrastructure is also good.
ii) Demand Conditions: Demand conditions have lately deteriorated because of the high unemployment rate in the country. According to official figures the unemployment rate currently is around 25 %. The Economist puts this figure at a much higher 40 %. Around 50 % of the South Africans under 24 years are unemployed. 30 % of those who are employed earn less than $ 2 per day. Income inequality is at an all time high.
If the situation at the employment front doesn’t improve then demand for high value food items is likely to suffer. In such a scenario demand for low value, inferior food items is likely to go up.
iii) Related and supporting industries: There is shortage of food processing units. So a retailer entering the country may have to make investments in setting up food processing facilities. This will push up the cost of entering the country.
Because of high unemployment and low wages, input costs in terms of cost of human resources employed is likely to be low. The supply chain and distribution infrastructure is good. Fresh fruit items like fruits and vegetables can be bought in large quantities from local producers. This can be a cheaper option than importing them from foreign markets.
iv) Firm structure, strategy and rivalry: The food retail industry in the country is not extremely competitive. There is fair amount of competition but there are untapped opportunities for potential entrants.
Most of the existing players have devised their strategy around cost leadership. They transfer the resultant cost savings to customers in the form of lower prices. Some of the retailers have conflated this cost leadership with product leadership. They stock and display a large variety of food and beverage items. Many retailers sell a large amount of high quality imported items like fruits.
v) Government: Corrupt and inefficient government is clearly the biggest problem of the country. The present African National Congress government under the presidency of Jacob Zuma is flouting laws and is handing out contracts and natural resources to those who are loyal to the party. The political government regularly intervenes in the functioning of the judiciary and has severely hampered the independence of this institution.
Crony capitalism has gained ground and foreign investment has virtually dried under Mr. Zuma’s regime. This is the major reason for high unemployment in the country. Economic competitiveness has been reduced and South Africa’s growth rate of 2 per cent is much lower than the average growth rate of 6 % recorded in rest of Africa in 2011-12. Little hope comes from the opposition Democratic alliance ( DA). Its leader is a white woman Helen Zille. The DA advocates the right economic and social policies for the country. But the 60 % black population of the country perceive DA as a party of whites. So the chances of DA replacing ANC from power seems to be very slim. Therefore South Africa has virtually become a one-party state since the end of apartheid in 1994.
vi) Chance events: These are those events which are outside the control of the firm or company. Crime is one such event in South Africa. It is posing a big social problem in the country. Strikes by workers are becoming increasingly frequent and often turn violent. In August this year a strike at a platinum mine in Johannesburg turned so violent that 34 people were killed.
Part 2: Contemporary Management Issues in food retail industry in South Africa
The first and foremost management issue is culture. The role of local culture has a great bearing on the quality of human resources in South Africa. The quality of human resources is good in large cities like Cape Town but it is bad in smaller cities and rural areas. A food retailer therefore will have to invest heavily in training and development of human resources. Our company is headquartered in UK. The local employees may have very different cultural sensitivities from that of the key managers. It is the responsibility of the human resources management to understand the cultural sensitivities of the local employees and communicate them to the senior management.
Wages are low but demand for increasing them is growing in intensity and clamor. Strikes have become a commonplace phenomenon. It will be a challenge before human resources management to keep the employees satisfied and motivated. Many American and British companies in the country are suffering from cultural conflicts with employees. These conflicts have sometimes culminated in strikes and lockouts. Employees often resort to violence in the event of strikes or lockouts. South Africa suffered from racial discrimination in the years before the end of apartheid in 1994. The blacks suffered under the apartheid regime. They are therefore very sensitive about racial issues (Rugman, A.M., & D’Cruz, J.R.,1993).
60 % of the population of South Africa is black. Black employees often become more racially conscious when they work for a company headquartered in a country like UK or United States. All efforts should be made so that the employees never get even the slightest impression of racial discrimination.
Cultural issues, skills shortage and employee discontentment are serious management issues in the whole of South Africa. Any food retailer entering the country will have to deal with them if it wants to stay there and prosper (Grant, R.M, 1998).
The second management issue is of strategic nature. It will require creation of processing and distribution infrastructure in the towns and rural areas of the country. Without adequate food processing and storage facilities a food retailer cannot implement its strategy. For serving the more backward countries supply chain infrastructure also needs to be created. Tighter cost control through efficient and effective supply chain management and operations management can give a new retailer competitive advantage.
Part 3: Market Entry Strategy
Strategic alliances represent one way of entry into the South American company. Our company can enter into a joint venture with a local company or retailer. This will reduce our exposure in terms of investments. At the same time the local partner will have better understanding of the unique characteristics of South African market.
Global coffee retailer recently used the strategic alliance route for entering the Indian market. It has entered into a joint venture with a local company, Tata Global Beverages ltd. Our company can use such a market entry strategy for entering the South African market.
Another entry strategy can be that the company goes all on its own and makes the direct investments required for entering the South African market. This will give it more independence in terms of operational and management decisions. The disadvantage of this entry route is that it increases the financial exposure of the company.
Our company can enter the South African market directly and may then choose the franchise route for further expansion inside the country. The franchise route will enable faster expansion. However quality control can be a key management issue in that case. Many franchisees in the food retail industry in the country have suffered from poor quality and operations management. This has given a bad name to the brand image of the parent company.
McDonald’s has successfully used the franchise route over the years. It has succeeded in controlling quality of operations and services at its franchisees by giving training to franchisees. It keeps a close check at the operations management in the restaurants run by franchisees. Every country in which McDonald’s operates has at least some company owned restaurants. These restaurants set the quality and service benchmark for the franchisee restaurants. McDonald’s manages the supply chain of its franchisee restaurants. It usually charges a percent of the revenues from the franchisees besides fee for marketing and brand management services (Grant, R.M, 1998).
Our company can replicate the model of McDonald’s for entering South Africa. It can set a fully owned subsidiary there. In major cities it can open company owned and operated stores. These food stores will be managed by the company. For expansion into smaller towns and cities it can use the franchisee route. It can train these franchisees in operations management.
Supply chain management is one of our core competencies. We should manage the supply chain for our franchisees in South Africa while leaving the operations management in the hands of the franchisees. The South African subsidiary will have a quality control department which will monitor the operations of the franchisees.
Another entry strategy that the company can explore is through the export route. However this route can be used only for our branded and packaged food items. Alliances can be made with export agents and distributors in the country. These agents can receive our products inside the company and can then distribute them to other retailers. This is the least risky entry strategy because it doesn’t require any capital expenditures on the part of the company. At the same time it will also yield minimal market share and profits for the company.
Marketing Mix of our company on entering South Africa:
The marketing mix on entry in the South African food retail market should be spun around the 7Ps. These 7Ps are (Philip Kotler, Kevin Kohler, 2000):
i) Product: Our food and beverage products should be of the highest quality. We should try to attain product leadership in this segment. This leadership can give a sustainable competitive advantage over competitors. Our company should also stock a wide variety of food merchandize in its stores.
ii) Pricing: Pricing is very important because South African customers are very price and value conscious. Our company should attain cost leadership through efficient and effective supply chain management and operations management. The cost savings from this should be transferred to customers in the form of lower prices.
iii) Place: Distribution will play a very important role in the future success of the company. On entering the South African market stores should be opened in strategic locations of major cities like Cape Town and Johannesburg. In the second stage the company can expand its stores in second tier cities and towns.
iv) Promotions: Promotions should be carried out through advertising in print and electronic media. The promotions should emphasize on the brand image that the company enjoys. Promotional messages should communicate the right value proposition to the customers. The company should be positioned in the minds of the customers as the foremost retailer of food products.
v) Processes: The right processes in supply chain and operations management will make strategic implementation possible. Without the right processes the company will not succeed in achieving cost and product leadership. It just needs to replicate its tried and tested processes in supply chain and operations management in South Africa.
vi) Physical infrastructure: Physical infrastructure in supply chain, processes and stores will enable the company to serve its customers in a better way.
vii) People: The employees need to be trained so that they can serve the customers and manage the operations of the stores. The company will have to invest in training and development of employees. The employees will act as the interface of the company with the customers.
Recommendations:
The South African market has some inherent risks and challenges. If these risks and challenges can be handled in an effective way then the market will turn out to be of strategic importance for the company. It can in future leverage the experience gained in South Africa for expansion into other African markets. Entry into the South African market looks quite feasible. The diamond model analysis reveals the political, economic and social challenges of South Africa. The right entry strategy seems to be that in which the company enters the South African market through direct investment route. It should establish a few company owned stores while establishing a strong franchisee network. This entry strategy will limit the capital expenditure of the company as a significant portion of the investments will be made by franchisees. At the same time it will ensure fast expansion inside South Africa.
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